1031 Exchanges Ending? (by Ray-N-Pa [PA]) Nov 21, 2020 9:11 PM|
1031 Exchanges Ending? (by Richard [MI]) Nov 21, 2020 10:00 PM
1031 Exchanges Ending? (by JB [OR]) Nov 21, 2020 10:06 PM
1031 Exchanges Ending? (by Ray-N-Pa [PA]) Nov 21, 2020 10:29 PM
1031 Exchanges Ending? (by 6x6 [TN]) Nov 22, 2020 9:19 AM
1031 Exchanges Ending? (by MikeA [TX]) Nov 22, 2020 10:56 AM
1031 Exchanges Ending? (by Ray-N-Pa [PA]) Nov 22, 2020 12:00 PM
1031 Exchanges Ending? (by Oregon Woodsmoke [ID]) Nov 22, 2020 12:12 PM
1031 Exchanges Ending? (by John... [MI]) Nov 22, 2020 12:22 PM
1031 Exchanges Ending? (by Ray-N-Pa [PA]) Nov 22, 2020 4:58 PM
1031 Exchanges Ending? (by John... [MI]) Nov 22, 2020 9:01 PM
1031 Exchanges Ending? (by Robin [WI]) Nov 22, 2020 9:28 PM
1031 Exchanges Ending? (by John... [MI]) Nov 22, 2020 10:36 PM
1031 Exchanges Ending? (by TM [IN]) Nov 23, 2020 7:52 AM
1031 Exchanges Ending? (by Hammer [TN]) Nov 23, 2020 7:57 AM
1031 Exchanges Ending? (by Marv [IL]) Nov 23, 2020 9:02 AM
1031 Exchanges Ending? (by John... [MI]) Nov 23, 2020 4:02 PM
1031 Exchanges Ending? (by John.... [MI]) Nov 23, 2020 4:03 PM
1031 Exchanges Ending? (by Ray-N-Pa [PA]) Nov 24, 2020 6:59 PM
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1031 Exchanges Ending? (by Ray-N-Pa [PA]) Posted on: Nov 21, 2020 9:11 PM
What Would the End of 1031 Exchanges Mean for Real Estate Investing?
Oct 30, 2020 by Matt Frankel, CFP
There are several tax benefits available to real estate investors, but perhaps none more valuable than the Section 1031 like-kind exchange, more commonly known simply as the "1031 exchange."
To learn more about how these work, you can read our guide to 1031 exchanges, but the general idea is that if you sell one investment property and use the sale proceeds to purchase another one, you can avoid paying capital gains tax on the sale.
For example, let's say you bought one investment property 10 years ago and own it free and clear with a $100,000 adjusted cost basis. If you sell it for $250,000, you would ordinarily have a $150,000 taxable gain, some of which would be considered depreciation recapture (taxable at a 25% rate) and some of which would be considered a capital gain (taxable at your capital gains tax rate). But if you were to use the proceeds to purchase another investment property for $250,000 or more, you can effectively transfer your cost basis to the new property. In short, your taxable gain doesn't just go away, but it wouldn't be taxable until you sell the new property.
Why could 1031 exchanges go away?
T is a big supporter of tax breaks for real estate investors. But former V P B, who is currently leading comfortably in the polls, is not.
B tax plan has specifically called for eliminating tax breaks for real estate investors in order to pay for other provisions. And while it didn't specifically mention 1031 exchanges, it's the most likely real estate tax break to be on the chopping block, simply because of the amount of money that's passed through to other properties on an annual basis. Indeed, 1031 exchanges account for 6% of all commercial real estate sales volume and cost the government $2 billion to $4 billion in lost tax revenue per year, according to a study by the University of Florida and Syracuse University's Whitman School of Management.
1031 exchanges are only a part of the plan
Not only could B plan eliminate 1031 exchanges, but it would also raise capital gains taxes on high earners. Specifically, the plan would get high earners to pay more by "asking those making more than $1 million to pay the same rate on investment income that they do on their wages," says the B website.
To put it mildly, this could be a big deal. The current maximum capital gains tax rate is 20%, and it only jumps up to 23.8% with the net investment income tax that high earners have to pay. But B wants to raise the top income tax bracket to 39.6% (currently 37%), so capital gains taxes could nearly double for high-income real estate investors.
What would this mean for real estate investing?
The short answer is that if 1031 exchanges are eliminated, it would make real estate investors think twice before selling investment properties -- especially true if higher-income investors end up having to treat capital gains as ordinary income.
To be clear, I'm not trying to be political here; I'm not opposed to or in favor of B tax plan. But if it's ultimately signed into law as currently written, it could take away one of the main incentives for real estate investors to not only put their appreciated investment properties on the market but to use the proceeds to buy another one.
1031 Exchanges Ending? (by Richard [MI]) Posted on: Nov 21, 2020 10:00 PM
Anytime the govt decides to penalize people with a decent amount of money, those people will leave. Just look at NY and NJ and Calif.
People with enough resources can and will go where they get a better deal. They have options. If we can't sell or exchange perhaps we will just borrow out the maximum limit and keep it. Whatever works. --75.7.xx.xx
1031 Exchanges Ending? (by JB [OR]) Posted on: Nov 21, 2020 10:06 PM
"...and cost the government $2 billion to $4 billion in lost tax revenue per year, according to a study..."
The money generated from this and all the other tax hikes is a pitifully tiny percentage of what Pe losi and the squad want to dish out right now in more stimulus (another $5 to $8 trillion). Then throw in B's plan to put the taxpayers on the hook for student debt, Medicare for all, etc...
It's like throwing pennies into a wishing well and saying that you plan to use the proceeds to pay for your cruise around the world next week. --73.25.xx.xxx
1031 Exchanges Ending? (by Ray-N-Pa [PA]) Posted on: Nov 21, 2020 10:29 PM
Sure I believe 1031's generate revenue.....but I believe they are overlooking how a 1031 exchange can save jobs too.
Let use the example of a struggling restaurant owner. Covid 19 comes around and you are close to shutting your doors for good. Instead of closing the place down and firing staff - you can sell the place with a NNN lease in place and do a 15 year lease back with an option to buy the place. It is like getting a loan from a bank when the banks are not lending to that industry.
Elected officials are supposed to be smarter than us. If they believe allowing money to stagnate is good for the economy, I would argue otherwise. That just keeps small business operators with great ideas from moving upward. I would just to expect to see installment sales increasing instead of 1031s.
What I have seen though over the past six months or so is a compression in Cap Rates in solid NNN properties.
If this plan does move ahead, I could absolutely see the value of smaller self managed commercial units taking a big hit as managers of these assets try to some last minute scrambling to getting into something more hands off.
1031 Exchanges Ending? (by 6x6 [TN]) Posted on: Nov 22, 2020 9:19 AM
Thank you for sharing this and for the examples. I still have trouble wrapping my head around it though. --73.120.xx.xxx
1031 Exchanges Ending? (by MikeA [TX]) Posted on: Nov 22, 2020 10:56 AM
Also in the plan is the elimination of the stepped-up basis of valuation on death so there is no way to bypass the tax man. The 1970's were a perfect example of what will happen. Lots of businesses, especially Agriculture and Real Estate will go to the auction block instead of to heirs, gulped up by large conglomerates. --64.130.xx.xxx
1031 Exchanges Ending? (by Ray-N-Pa [PA]) Posted on: Nov 22, 2020 12:00 PM
Concur with you Mike.
The good news is there are work arounds available. If the land is in a land holding trust, then you can sell the beneficial interest instead of the real estate.
1031 Exchanges Ending? (by Oregon Woodsmoke [ID]) Posted on: Nov 22, 2020 12:12 PM
It will eliminate more rentals from the available unit pool.
If I have to sell and I have to pay a high tax no matter what I do, I'm not going to replace the unit I have just sold.
In fact, I can not replace the unit I have just sold because The government took so much money, I don't have enough left to buy another house. --76.178.xx.xx
1031 Exchanges Ending? (by John... [MI]) Posted on: Nov 22, 2020 12:22 PM
So, a couple quick things:
1. B's plan doesn't even mention 1031 Exchanges. So, all talk about them going away is just GUESSING at what might happen. Do I think it likely? Yes. But just pointing out that this is still a guess.
2. B's plan still states that it would apply only to those with an AGI over $400,000. I will not be affected by this and I think most of you won't either. Some? Maybe. Most? Doubtful.
Personally, while I've liked the idea of taking advantage of 1031 Exchanges, I've always felt that it was actually too easy of a way for people to avoid paying taxes that they rightfully owe. The 1031 Exchange allows deferral of taxes until death -- and then uses another loophole to not even have to pay those taxes out of the estate. Is that a good deal for wealthy real estate folks? Absolutely. But it has never seemed quite right/fair to me. It is a way to get around paying taxes that should be rightfully owed.
1031 Exchanges Ending? (by Ray-N-Pa [PA]) Posted on: Nov 22, 2020 4:58 PM
Where the plan does not specifically single out 1031's by name, the exact words on it coupled by what he has said in his debates tells me what he plans on doing
" The plan will cost $775 billion over 10 years and will be paid for by rolling back unproductive
and unequal tax breaks for real estate investors with incomes over $400,000 and taking steps to
increase tax compliance for high-income earners."
This plan does not say $400,000 of rental income, it just says $400,000 in income. How many transactions does that require you to complete to $400,00 IN INCOME.....not profit but income.
I am a bit fortunate.....I currently have three 1031's in various stages of completion today. I would suggest that collectively investors take a look at the long term game plan as it might make some sense to pursue more of a buy and hold strategy.
I am thinking this hits the heartland harder than the more expensive coast due to depreciation. What is to say that accumulated depreciation is not reclassified since there would be limited ability to transfer it. Today you pay tax on depreciation if you don't exchange.
1031 Exchanges Ending? (by John... [MI]) Posted on: Nov 22, 2020 9:01 PM
Again, B's plan to increase taxes is on people with an AGI over $400,000. Sorry, but if your AGI is over $400,000, then I still think you should be paying your fair share of tax. I've still always felt that the 1031 Exchange cheats the system by allowing it to continue until death -- and then not even having to pay it even then!
I am very curious how many people here really have AGIs over $400k. My guess is that it is very few.
1031 Exchanges Ending? (by Robin [WI]) Posted on: Nov 22, 2020 9:28 PM
Yep, kill the goose that lays the golden eggs. That will make everyone better off?? --104.230.xxx.xx
1031 Exchanges Ending? (by John... [MI]) Posted on: Nov 22, 2020 10:36 PM
1031 Exchanges Ending? (by TM [IN]) Posted on: Nov 23, 2020 7:52 AM
If this all happens, it just puts more emphasis on proper estate planning. My parents have everything in a FLP. Easily transferred down to us kids, minimal to no taxes. That bypasses the step up basis...
Have no plans to sell. If I do and there isn't a 1031 option, I'm sure some smart attorney will find the loop hole. Congress always gives one for themselves to exploit. Mean while guys, don't worry about it. Worry about your next purchase and having your current biz run on auto pilot. Focus your energy on what you can control. --76.77.xxx.xxx
1031 Exchanges Ending? (by Hammer [TN]) Posted on: Nov 23, 2020 7:57 AM
"fair share" is a straw man argument based in envy.
What is Fair? Fair is subjective.
If someone takes your money by threat of force that by definition is theft.
Is theft morally acceptable if you vote for someone else to do the stealing? Is theft Fair if the person being robbed has more than you?
What if he only has $1 more? $1000 more? $1Million more? At what point is it fair to rob someone?
See how Fair is a subjective argument that doesn't hold up to scrutiny.
Instead of fighting over how "fair" the amount of robbery is, why not focus on how we can ALL be robbed less. --152.97.xxx.xx
1031 Exchanges Ending? (by Marv [IL]) Posted on: Nov 23, 2020 9:02 AM
There are no proposed laws to take away Sec 1031.
Even if they went away, capital gains taxes are low, ranging from 0% to 20%. Its not the end of the world. --67.184.xxx.xxx
1031 Exchanges Ending? (by John... [MI]) Posted on: Nov 23, 2020 4:02 PM
Hammer: Sorry, I think you are making the Straw Man argument here. I think most people would agree that it makes sense to pay taxes when you have income from the sale of a property. The 1031 allows to to postpone this, which I am fine with, but then another law allows that postponed payment to NEVER be do. That is what I don't think is "fair" and I don't think it is THAT subjective.
It is generally considered normal that people pay taxes based on their income -- and that income sometimes includes the sale of real estate.
Also, we can "ALL be robbed less" when ALL of us pay our fair share. I still maintain that people making $400,000+ should have to pay when they sell a property and have income from that sale. So that that we can "ALL be robbed less." Them paying their share is not robbing them. Allowing them to NOT pay it due to a tax loophole means that the rest of us DO have to pay more for other taxes. Isn't that what is "robbing ALL" of us? Those that aren't paying on their income due to a couple of tax loopholes?
1031 Exchanges Ending? (by John.... [MI]) Posted on: Nov 23, 2020 4:03 PM
Typo. I meant: "then another law allows that postponed payment to NEVER be made." --67.209.xxx.xx
1031 Exchanges Ending? (by Ray-N-Pa [PA]) Posted on: Nov 24, 2020 6:59 PM
Pull 8% of the commercial real estate off the market place and freeze it, and at the same time make Land lording so attractive that experienced Land lords want to drop the asset class - then see what happens to the market.
Boys and girls, I do hope you have your vacuum cleaner up some deals............and who will end up doing that? Will that allow for the more even distribution of money? I don't think so - I just see the very well off become even more so after devaluing the asset --24.101.xxx.xx
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